Amazon.com (AMZN) Strategies for Bulls and Bears

Late last week, Caris & Co. initiated coverage on four major Internet stocks: Google GOOG, eBay EBAY, Yahoo! YHOO, and Amazon.com AMZN.  GOOG was given an “average” rating but the other three were named a “buy.” For AMZN, the covering analyst gave the stock a 12-month price target of $164 (nearly 30% above the stock’s current price of $128.53).  He cited the online retailer’s potential for growth with the Kindle e-reader and Amazon Web Services, noting that these opportunities are backed by a strong e-commerce business model.

Investors who don’t want to spend nearly $13,000 on 100 shares could choose to trade the shares using one of many bullish option strategies.  Alternatively, those who disagree with the Caris analyst and who expect a reversal in the stock could use a bearish option strategy in lieu of shorting the stock (which can be a very risky endeavor).  Two hypothetical options trades – one bullish, one bearish – are described below.  Remember that these are merely examples, not recommendations.  Consider your own risk/reward parameters and trading style before executing any new trades.

*Prices given as of Monday morning

Bullish Option Strategy: Synthetic Long Stock (Split Strikes)

The synthetic long stock strategy simulates the risk and reward of a long stock position but requires less capital at the outset.  Currently, an investor could buy January 150 calls and simultaneously sell January 125 puts, collecting a net credit of $6.70.  In the weeks and months leading up to expiration, the strategy behaves much like a long stock position would, with unlimited upside and significant downside contained only at the zero mark.  Be aware that there is margin required to hold a short put position estimated to be 20% of the underlying price less the out of the money amount.

In the unlikely event that the trader holds both options until expiration, upside is unlimited above the 150 strike.  Between 125 and 150, the investor keeps the premium collected ($6.70). Breakeven is $118.30, or the put strike minus the credit.  If AMZN is anywhere south of this level at expiration, the strategy will lose money.

Bearish Option Strategy:  Bear Put Spread

Investors who have a contrary view could buy the October 125/100 put spread (buying the 125-strike put, selling the 100-strike put) for a net debit of $8.30.  If AMZN is trading above 125 when these options expire on October 15, this is the maximum the trader can lose (as opposed to the unlimited risk taken on by a short seller).

The maximum potential gain is $16.70, which occurs if AMZN is trading below 100 when the options expire.  Breakeven at expiration is $116.70, so anywhere below this level, the bear put spread will be profitable.

We Want Your Take

Are you an Amazon fan or do you think it will be targeted by the competition?  Do you think the iPad will cut into Kindle reader sales or be a boon for sales of e-books from the Kindle store?  Let’s hear your Amazon diagnosis in the comments section below.

Compare OptionsHouse rates for stock options with other brokers. New to options?  See how your trade ideas would fare in a virtual trading account before committing any real money.

Photo Credit: goXunuReviews

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